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The 1 Metric Chipotle Investors Should Be Watching Now

Comparable sales have suddenly turned positive, but investors will want to focus on the two-year stack to get the best sense of Chipotle's recovery.

Chipotle Mexican Grill, Inc.(NYSE:CMG) finally lapped the year following its E. coli outbreak with the release of its fourth-quarter earnings report last week.

The results offered some psychological relief for investors: comparable sales jumped by double digits in December as the company moved past the superficial effects of the food safety crisis. However, it wasn't enough to push the stock higher, and shares fell 4.3% as the company missed earnings estimates and investors were again disappointed with the lack of momentum in the turnaround.

Image source: Motley Fool.

If you're getting impatient with Chipotle's comeback, you're not alone. The stock has remained mired around the $400 mark for more than a year, little more than half of what it was worth at its peak in 2015. Comparable sales fell more than 20% last year, a poorer performance than all but the biggest bears expected.

Same-store sales for the fourth quarter were down 4.8%, but jumped 14.7% in December and then 24.6% in January. While that may seem like a strong recovery, it still doesn't compensate for the drops in comparable sales from the year before.

Management has projected same-store sales growth in the high-single digits for the year, but rather than just look at one-year comparable sales growth in 2017, investors would be better off gauging Chipotle's comeback by the two-year stack of comparable sales, which takes into account the plunge a year ago. That will be the best indicator of the success of Chipotle's comeback as it attempts to return sales to where they were before the crisis.

The long view

Comparable sales fell at Chipotle by more than 20% in each of the first ten months of 2016 after the crisis began in November 2015. The chart below shows the month-by-month progress of its comparable sales.

Source: Chipotle quarterly reports.

As you can see, Chipotle's comparable sales bottomed out last January as the CDC declared an end to the E. coli crisis in February and the company offered free burritos to all its customers. From there, sales recovery was modest until comps spiked in November when the company began to lap the crisis. However, that spike is not a good indication of the company's performance. For a better view, we need to look at the two-year comp from November 2015 going forward, as the chart below allows us to do.

Source: Chipotle quarterly reports.

As you can see, Chipotle's two-year stacked comparable sales remain well in the red, but they have improved steadily in each of the last three months, a promising sign. That recovery could slow down now, though, as the company's now lapped the worst of the crisis.

What it means for the recovery

Management is forecasting a comparable sales increase in the high-single digits this year. Following last year's decline of 20.4%, that means the company expects two-year stacked comparable sales of about -10 to -13%. That's not where the burrito chain wants to be.

Investors should be hoping for the company to recover all the lost sales as soon as possible, meaning that stacked comparable sales figure would go to zero. However, the -11.8% result in January could mean the two-year stack for 2017 will only hit negative single digits for the year, a sign that sales are coming back faster than thought. The chart below shows how three different sales recovery scenarios could play out.

Source: Author projections.

The three scenarios above show that in a bullish scenario, Chipotle will recover lost sales by next year, but not until 2020 in the average scenario, and not until 2022 in a bearish scenario.

The bullish case is the vastly preferable option, as the company cannot waste any more time than necessary getting back to its pre-crisis strength. Costs will rise each year, and we've already seen aggressive growth on the labor line and on avocado prices. A slow recovery will cost it dearly on the bottom line, as it did last year, as it won't be able to absorb increased costs. The faster management can recover lost sales, the faster it can implement price increases where needed to help with the profit recovery.

In other words, the company needs to deliver comparable sales growth of at least high-single digits this year. If it hasn't fully recovered lost sales by 2019 at the latest, the stock won't have a path back to $750.

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